FOOD&FOOD PROCESSING SECTOR TRACKING REPORT:MILK COMPETITION INTENSIFIES INDUSTRY LEADERS MAINTAIN DOMINANT POSITION

类别:行业 机构:海通证券股份有限公司 研究员:Hongwei Wen/Mengyao Kong 日期:2016-06-11

  Investment Highlights:

      Consumption demand is weak, revenue and pre-tax income growthdecelerate. According to National Bureau of Statistics (NBS) data, the dairyindustry in China has re-entered a growth phase. Production reached 27.83mtonnes in 2015, up 4.6% y-o-y. Industry revenue was CNY332.85bn, up 1.7%y-o-y. Industry pre-tax income stood at CNY2.17bn, up 7.7%. Revenue andpre-tax income sustained growth, albeit at slower rates. Growth deceleratedby 16.41pct and 17.95pct, respectively, on a sluggish economy and weakerdemand. In Q1 2016, eight listed dairy companies reported total revenue ofCNY23.18bn (up 2.9% y-o-y) and net income attributed to shareholders ofCNY1.8bn (up 19.6% y-o-y)。 Growth of net income attributed to shareholdersoutpaced revenue growth, benefitting from falling costs, which led to highergross margins.

      Dairy producers’ gross margins improve on declining raw milk prices. Ifwe take eight listed Chinese companies as examples, the dairy industry’sgross margin was 36.72% in 2015, up 2.85% y-o-y. It reached 41.28% in Q12016, up 4.45pct y-o-y. The consistent growth in gross margin was mainlyattributable to lower raw milk prices. Global raw milk output by major exportersis expected to register y-o-y growth, while domestic downstream consumptionremains weak. Producers’ inventories remain at high levels and, therefore,dairy product producers lack the incentive to buy raw milk. This leads us tobelieve that raw milk prices will remain at lower levels in 2016, benefittingdownstream producers.

      Industry competition intensifies, increase in expenses weigh onshort-term profits. Expenses of eight listed dairy producers reachedCNY27.85bn in 2015, up 16.56%, with an expense ratio of 30.03%, up 2.71pcty-o-y. Selling, general and administrative, and financial expense ratios were24.05% (up 2.18pct y-o-y), 5.42% (up 0.32pct y-o-y) and 0.56% (up 0.21pcty-o-y), respectively. In Q1 2016, expenses were CNY7.46bn, up 14.20%y-o-y; the expense ratio was 32.03%, up 3.24pct y-o-y. Selling, general andadministrative, and financial expenses were CNY6.22bn (up 16.88% y-o-y),CNY1.15bn (up 8.89% y-o-y),CNY84m (down 43.77% y-o-y), respectively.

      The expense ratios were 26.72% (up 3.25pct y-o-y), 4.95% (up 0.29pct y-o-y)and 0.36% (down 0.30pct y-o-y), respectively. Among the three majorexpenses, selling expenses have continued to increase consistently. Sluggishraw milk prices and weak consumption demand have led to intensifyingcompetition, price wars and aggressive promotional campaigns. However, ingeneral, the dairy industry’s net profit margin was up 0.35pct y-o-y to 6.28% in2015, benefitting from improved gross margins.Net profit margin rose furtherto 7.88% in Q1 2016.

      Bullish on medium- to long-term industry outlook, Yili Dairy (600887)exhibits top player strength with dual-10billion figures. In the short term, amacroeconomic slowdown and weak consumer market will drag down thedairy industry and market revenue is unlikely to increase. We believelong-term growth potential remains intact, and per capita dairy productconsumption (particularly in rural areas) indicates improving space. Also, aconsumption demand upgrade and increasing health awareness should helpstreamline the sector’s product mix and support product innovation. Healthierproducts are preferred by consumers and, therefore, have more growthpotential. The dairy industry is expected to diverge after significant growth.

      Leading dairy companies are expected to show more clear growth trend asthey have whole industrial chain and the ability of global resources integration.

      We are bullish on Yili Dairy as: (1) it has maintained its competiveness and strengthened its market share – withrevenue outperforming its closest rival by over CNY10bn – despite stagnant sector growth; and (2) its sellingexpenses exceeded CNY13bn in 2015 on the background of intensive competition. Its net income attributed toshareholders was CNY4.6bn, which we believe will be elastic, as competition environment improves.

      Key uncertainties: Intense industry competition, food safety issues, and fewer promotional events impact demand